How to Price, Structure, and Diligence Around Customer Concentration

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When evaluating a small business to acquire, to suggest that some form of concentration is common is likely an understatement. Indeed, in most cases, concentration of some variety is a borderline inevitability. Though this often takes the form of customer concentration (the focus of this blog post), it can take other forms as well, including key person concentration, supplier concentration, reseller concentration, and technology/platform concentration, among other forms.

The aim of this blog post is to discuss when customer concentration is acceptable (and when it is not), how to incorporate its associated risks into the transaction’s price and structure, how to diligence the likelihood of those risks manifesting, and the types of business models where the defection of large customers should be viewed as an expectation, and not as an improbable risk.